U.S. law reaches for China in drywall lawsuits

Colleen Stephens stands Saturday in the house she and her family relocated to after their first home was contaminated by toxic Chinese drywall in Virginia Beach, Va. Decisions in state and federal courts in recent weeks involving a major Chinese manufacturer of drywall could mark a turning point for thousands of American homeowners.

Published: Saturday, October 13, 2012 at 6:15 p.m.

Last Modified: Saturday, October 13, 2012 at 6:15 p.m.

Three years ago, Colleen Stephens moved her family from a 5,000 square-foot, newly renovated home overlooking the bay in Virginia Beach, Va., into a house half the size and much further inland.

While she wasn't thrilled with the move, Stephens explained, “We would have rather lived in a tent in our backyard than put our kids back in our house.”

The bigger house had been renovated with Chinese-made drywall, and Stephens contends that it reeked of sulfur and made her family sick. She filed a lawsuit seeking damages in 2009, but so far, she hasn't received a cent, in part because of the complexities of suing a manufacturer from China.

But decisions in state and federal courts in recent weeks involving a major manufacturer of the drywall could mark a turning point for thousands of U.S. homeowners like Stephens, according to lawyers representing homeowners and homebuilders.

For years, the Chinese manufacturer, Taishan Gypsum, has argued that its drywall wasn't defective and that courts in the U.S. had no jurisdiction over the company since the drywall was sold in this country by another company, Taian Taishan Plasterboard.

But a federal judge in Louisiana ruled last month in a drywall case that Taishan Gypsum was responsible for its drywall sold in Florida, Virginia and Louisiana. The ruling by U.S. District Court Judge Eldon E. Fallon followed a similar decision on Aug. 31 by a state judge in Florida.

Miami-Dade Circuit Court Judge Joseph P. Farina ruled that the plasterboard company was wholly owned and controlled by Taishan Gypsum, sharing an office and employees, and therefore Taishan Gypsum was subject to the court's jurisdiction. The judge also noted that Taishan Gypsum “actively targeted the Florida market by courting Florida companies, mailing drywall samples to Florida, selling large amounts of drywall to Florida-based companies.”

Taishan Gypsum is appealing both rulings, and the company's lawyer, Joseph Cyr, said he was confident his client would prevail. Cyr said U.S. distributors came to China looking for drywall in 2005 and 2006.

“Taishan Gypsum did not ship any drywall to the U.S.,” he said, adding that Taishan “strongly disputes any claim that the drywall is defective.”

But lawyers representing homeowners and homebuilders suing over the suspect drywall suggested the rulings could have broad implications. In all, the lawyers said, about 7,000 to 10,000 homes suffered damage due to defective Chinese drywall installed in the aftermath of Hurricanes Rita and Katrina and during a building boom in the South.

“This opens the door for courts to look to Chinese manufacturers to stand behind their products,” said Hilarie Bass, a lawyer with Greenberg Traurig in Miami who represents several builders, including Lennar Homes, which she says spent more than $40 million replacing defective drywall and is now trying to recover money from Taishan Gypsum.

The drywall dispute is indicative of the complexities of sorting out legal claims in an increasingly

interconnected world. As Jacques deLisle, a law professor at the University of Pennsylvania put it, “Products move very easily across borders. Legal judgments, not so much.”

With the exception of the members of the European Union, countries rarely recognize court judgments from other nations. But often the problems are resolved in other ways. For instance, businesses from different countries include binding arbitration agreements in their contracts, said Stephen C. Yeazell, a law professor at UCLA.

Or, instead of pursuing a foreign-based company, plaintiffs often sue the U.S. subsidiary of a foreign manufacturer or a major distributor.

In the case of the defective drywall, lawsuits were filed against the entire supply chain – builders, installers, distributors – but none had enough money to pay the claims, said Arnold Levin, a Philadelphia lawyer representing homeowners in the case before Fallon in Louisiana.

“Only the manufacturer can make this right,” he said.

Some members of Congress have taken up the issue, introducing the Contaminated Drywall Safety Act that, among other things, says the secretary of state should insist the government of China force manufacturers to submit to the jurisdiction of U.S. courts. The bill passed the House last month and hasn't yet been taken up by the Senate.

In the years before the economic crisis, hundreds of millions of square feet of drywall manufactured in China was exported to the United States. But soon after the Chinese drywall was installed, either in new homes or renovated ones, homeowners noticed a sulfurous smell. In addition, appliances like televisions and microwaves inexplicably failed, and silver and copper items were covered with black soot.

Many homeowners also complained of health problems, including headaches, respiratory ailments and skin and eye irritation. Hundreds of lawsuits were filed in state and federal court against builders, installers, suppliers, importers and manufacturers.

The Chinese drywall was primarily manufactured by two companies, Taishan Gypsum and Knauf Plasterboard Tianjin, a Chinese affiliate of a German company. Last December, Knauf entered into an agreement to resolve the claims against it, contingent on Fallon's approval next month.

Steven Glickstein, a lawyer at Kaye Scholer who represents Knauf, said the cost of the settlement depends on how many homeowners are determined to have had installed Knauf drywall. The lawsuits against Taishan Gypsum, meanwhile, are on hold until the courts consider the company's appeals of the recent rulings.

Even if the homeowners and builders eventually win their cases against Taishan Gypsum, they face an even bigger challenge of collecting from the Chinese company.

Stephens, who is 44, is not getting her hopes up. “There's no way to hold a foreign manufacturer accountable in the U.S. court system,” she said. “All they have decided so far is that we have jurisdiction.”

Michelle Germano, who is also suing Taishan Gypsum, moved out of her condominium in Norfolk, Va., four years ago because it was like a “gas chamber.”

“I'm going to stay positive that something good is going to come out of this,” she said.

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